Do I Need Title Insurance on a Bank-Owned Foreclosed Property?

Shopping around for title insurance can sometimes save you significant money.

When banks and other lenders foreclose homes, they repossess and usually attempt to sell them at foreclosure auction. However, many properties end up on the books of their foreclosing lenders after they're repossessed and become what are commonly called bank-owned, or real estate owned properties. Generally, the titles of bank-owned properties sold to buyers are free of liens or other encumbrances. However, bank-owned foreclosures can sometimes be risky and foreclosing lenders may not catch all potential title problems, making obtaining title insurance important.

Bank Foreclosures and Title Insurance

Title insurance is designed to protect property buyers from title issues, such as old, unnoticed liens or potential competing ownership claims. Before selling a bank-owned foreclosure, the lender typically has the property's title searched for liens and other encumbrances and will eliminate them. As the buyer of a bank-owned foreclosure property, you'll also generally receive a title insurance policy paid for by the seller. You should never assume, however, that the title to any bank-owned property has been fully searched and then cleared by the lender.

Ordering a Title Search

At minimum, when purchasing a bank-owned property, you should conduct a search of public records that contain information about liens and outstanding property taxes. You can also order a title search on the property from a title company, although no title company will ever deliver a 100 percent guarantee that a property's title is free defects. However, title companies conduct thorough title searches and provide a fairly reliable abstract of title, or recitation of a property's ownership history.

Mortgage Lender Title Insurance

There are two types of title insurance, one for owners and one for lenders. A lender's title insurance policy protects only the mortgage lender, not the property owner. If you're using a mortgage to purchase a bank-owned property, the lender may require you to purchase lender's title insurance on its behalf. Lender's title insurance covers the amount of the mortgage loan, and the premium price is based on the loan's initial amount.

Lender's Title Insurance Costs

Title insurance policy costs vary by location and other factors, such as a mortgage loan's amount. If you're using a mortgage to purchase a bank-owned property and the seller provides owner's title insurance, you'll only need to pay for a lender's policy. At the time of publication, the average cost for lender's title insurance in California, for instance, was $175 on a $225,000 mortgage, according to the Home Buying Institute. Other title-related fees such as deed recording and closing services may also be part of your closing costs when buying bank-owned property.

About the Author

Tony Guerra served more than 20 years in the U.S. Navy. He also spent seven years as an airline operations manager. Guerra is a former realtor, real-estate salesperson, associate broker and real-estate education instructor. He holds a master's degree in management and a bachelor's degree in interdisciplinary studies.